Gov. Bush's Social Security Plan Relies on False Numbers

Gov. Bush's Social Security Plan Relies on False Numbers

For Immediate Release: May 15, 2000

Washington, D.C. -- George W. Bush has outlined a plan today to partially replace Social Security with a system of individual accounts. He has been rightly criticized by Vice-President Gore and others for his intention to avoid spelling out the details of the proposal. As everyone familiar with the privatization debate is aware, it is impossible to assess the true costs and risks of the proposal without knowing the specifics.

More importantly, Governor Bush's proposal appears to be relying on false projections for stock market returns. Governor Bush and his economic advisors apparently base their proposal on the assumption that the returns in the stock market will be the same in the future as they have been in the past. They make this assumption even though the Social Security trustees assume that the economy (and corporate profits) will be growing at half the rate in the next seventy-five years as they have over the last seventy-five years.</p> <p class=">
Given current market valuations, and the trustees projections for profit growth, the returns in the stock market will be between 3.5-4.0 percent above the rate of inflation, rather than the 6.0-7.0 percent assumed in Governor Bush's plan. This makes a huge difference in calculating the benefits of individual accounts. Governor Bush's false assumption will lead to projected benefits that are nearly fifty percent higher than a projection based on realistic assumptions about stock returns.

It is remarkable that Governor Bush and his economic advisors would propose a plan based on contrived numbers. The problem with his assumption about stock returns was first pointed out in a paper by CEPR co-director Dean Baker in 1997 ("Saving Social Security With Stock: The Numbers Don't Add Up," Century Foundation). Since then many other economists have come to the same conclusion, most notably M.I.T. Professor Peter Diamond, the nation's leading expert in public finance and macroeconomics (see "
What Stock Market Returns to Expect for the Future?")

More than a year ago CEPR's co-directors Dean Baker and Mark Weisbrot challenged every member of Congress who supported a privatization plan to construct projections of the components of stock returns (dividends and capital gains) which were consistent with their assumptions on rates of return. This challenge was also issued to the politicians who proposed placing a portion of the trust fund in the stock market, and to economists who were associated with these proposals.

While Harvard Professor and Bush campaign advisor Martin Feldstein did engage in an exchange of letters on this issue, neither he, nor anyone else was able to produce the simple projections that had been requested. The full exchange is available here. The reason is quite simple: it is mathematically impossible to project the stock market returns that they assume, while keeping the Trustees' assumptions about economic (and profit) growth. And if the Trustees' slow-growth assumptions were relaxed, there would be no long-term shortfall in the Social Security system's revenues.